All Cash Offers Mean the Real Economy is Booming...Err....
The housing market is red hot. I know this because people are paying for homes with full cash offers. Everything is awesome!
An apology in advance to all those who are not lucky enough to live in paradise (OMAHA!!!!)
I have always wanted to live in La Jolla, CA – the Omaha of the West Coast. The median sale price of a single family home is $3,500,000. 5 years ago, that median sale price was $2,000,000. $3.5M is a 38.9% increase from 2021.
Let’s say a qualified buyer, Lady Husker, heads to the bank for a loan to purchase a new home in La Jolla after moving there for a new job. That bank offers them $3.5M because they assume there will be a bidding war and full-price offers are the way to go. Don’t worry. Lady Husker is qualified and it is a “good” loan.
Mr. Corn, who bought his home 5 years ago for $2M, sells to Lady Husker for that $3.5. Cha-ching: that is $1.5M in cash for Mr. Corn.
Mr. Corn decides to leave the beach and sunshine and “settle down” in paradise out here in Omaha. He is still working the same job as he was 5-years ago but is taking advantage of his company’s new “work from home” policy. He pays off his loan from 5-years ago. He can now offer $1.5M in cash for the biggest house in town. Trust me, that is a GREAT budget in Nebraska.
He finds his dream home with acreage and everything and offers a full-price, all cash offer and still has enough left over to invest in a new brokerage account and pay for private school for the kids. Woohoo, Creighton Prep and Marian have amazing college placement rates.
The home seller in Nebraska is so very impressed with Mr. Corn. He surely worked so hard to scrimp and save to find that money to pay all in cash. What a producer! Things are booming in the "real economy".
That is a lot of windfall. A lot of “cash” flying around. BUT…where are the increases in goods and services creating the cash?
Mr. Corn did not “save” money to put down that all cash offer. He did not get a new job or produce more to get that cash. That money came from financial engineering.
This might be a problem!
If the Fed continues to increase rates to their target of 2%, we could see mortgage rates increase to 6.5% and beyond. So far this year, the 30-year fixed has already moved from 2.7% to just about 5%.
That could lead to a significant decrease in purchasing power. With that decrease in purchasing power, we could see less investment money go into the stock market especially as interest rates go up. Less spending and investing could lead to less government spending (haha). From here, we could see even more stress on purchasing power.
Welp…the WSJ told us something quite interesting the other day: Homes Earned More for Owners Than Their Jobs Last Year
Potentially ominous sign or is it…awesome?